Advance Financial Accounting and Reporting

FRANCHISE

Part I: Theory of Accounts

1. Under the IFRS, how shall revenue from contracts with customers such as revenue from initial
franchise fee be recognized by the franchisor?

a. Upon receipt of the initial franchise fee by the franchisor.

b. Upon signing of the franchise agreement.
c. When the franchisor satisfies the performance obligation under the franchise agreement.
d. Applying the legality over the substance of the transaction.

2. Under IFRS, how many entity satisfy a performance obligation under in a contract with
customers?

a. Satisfaction of performance obligation over time.

b. Satisfaction of performance obligation at a point in time.
c. Neither A or B.
d. Neither A nor B.

3. IFRS 15 provides that the initial franchise fee shall be recognized as revenue over time
(percentage of completion method) if any one of the following criteria provided below is met.
Which of the following indicator shows that initial franchise fee shall be recognized as revenue
at a point in time instead over time?

a. When the franchise simultaneously receives and consumes the benefits provided by the
franchisor’s performance as the franchisor performs.
b. When the franchisor’s creates or enhances an asset that the franchisee control as the
asset is created or enhanced.
c. When the franchisor’s performance does not create an asset with alternative use to the
franchisor and the franchisor has an enforceable right to payment for performance
completed to date.
d. When the franchisee has legal title to the franchise and has the significant risks and
rewards of ownership of the franchise.

4. Under IFRS 15, when shall a franchisor recognize revenue from contingent franchise fee or
revenue for a sales-based royalty?

a. When the sales of the franchisee occurs.

b. When the performance obligation to which some or all of the contingent franchise fees or
sales-based royalty has been satisfied or partially satisfied.
c. When both A and B events occur.
d. When either A or B events occurs.

5. What is the measurement of franchise revenue recognized from franchise agreement?

a. Fair value of the consideration received or receivable.

b. Book value of the consideration received or receivable.
c. Carrying amount of the consideration received or receivable.
d. Nominal amount of the consideration received or receivable.

Part II: Problem Solving

1. On January 1, 2016, MR. JOVEN entered into a franchise agreement with ONG to market
their products. The agreement provides for an initial fee of P12,500,000 payable as follows:
P3,500,000 to be paid upon signing of the contract and the balance in five equal annual
payments every end of the year starting December 31, 2016. Mr. Joven signs a non-interest
bearing note for the balance. His credit rating indicates that he can borrow money at 15%
interest for a loan of this type. The present value of an annuity of P1 at 15% for 5 periods is
3.352. The agreement further provides that the franchisee must pay a continuing franchise
fee equal to 3% of the monthly gross sales. On August 31, the franchiser completed the
initial services required in the contract at a cost of P4,290,120 and incurred indirect cost of
P175,000. The franchisee commenced business operations on November 30, 2016. The
gross sales reported to the franchiser were P1,800,000 for December 2016. The first
installment payment was made in due date.

1. Assume the collectibility of the note is not reasonably assured, how much is the
net income for the year ended, December 31, 2016?

a. 3,126,268
b. 3,201,268
c. 2,417,268
d. 3,072,268

2. Assume the collectibility of the note is reasonably certain, how much is the net
income for the year ended, December 31, 2016?

a. 9,438,880
b. 9,384,880
c. 6,027,520
d. 6,552,520

2. XY Inc., franchisor, entered into franchise agreement with AB Inc., franchise on July 1, 2016.
The initial franchise fees agreed upon is P850,000, of which P150,000 is payable upon
signing and the balance to be covered by a non-interest bearing note payable in four equal
annual installments. It was agreed that the down payment is not refundable, notwithstanding
lack of substantial performance of services by franchisor. Probability of collection is unlikely.

The following expenses were incurred:

Initial services:
Direct Cost 235,000
Indirect Cost 64,000
Continuing services:
Direct Cost 23,900
Indirect Cost 9,000

The management of AB has estimated that 5hey can borrow loan at rate of 12% (PV factor
3.04). The franchisee commenced its operations on July 31,2016. A continuing franchise fee
equal to 5% of its monthly gross sales was also specified in the contract. AB reported gross
sales of P950,000 for the month.

How much is the net income to be reported on August 31, 2016?

a. 59,550
b. 83, 450
c. 48,910
d. 72,810

3. MIKE restaurant sold a fastfood restaurant franchise to Irish. The sale agreement, signed on
January 2016 called for a P100,000 down payment plus two P50,000 annual payments
representing the value of initial franchise services rendered by MIKE restaurant. In addition,
the agreement required the franchisee to payw 8% of its gross revenues to the franchisor.
 The restaurant opened early in 2016 and its sales for the year amounted to P750,000. The
prevailing rate for similar note was 12% (PV factor was 1.6901).

How much is the total revenue for 2016?

a. 84,505
b. 244,505
c. 254,646
d. 266,646

4. On April 1, 2016, GOOD Inc. entered into a franchise agreement with BEST franchisee. The
initial franchise fees agreed upon is P246,900, of which P46,900 is payable upon signing and
the balance to be covered by a non-interest bearing note payable in four equal annual
installments. The down payment is refundable within 100 days. BEST Inc. has a high credit
rating, thus, collection of the note is reasonably assured. Out-of-pocket costs of P125,331
and P12,345 were incurred for direct expenses and indirect expenses respectively. Prevailing
market rate is 9%. PV factor is 3.2397.

For the fiscal year ended June 30, 2016, how much revenue from franchise fee will
the franchisor recognize?

a. 0
b. 208,885
c. 246,900
d. 83,554

5. McJobee operates and franchises restaurants around the world. On January 1, 2016,
McJobee entered into a franchise agreement with a franchisee. As part of its franchise
agreement, McJobee requires the franchisee to pay a non-refundable upfront franchise fee of
P95,000 upon opening a restaurant and ongoing payment of royalties, based on 10% of
franchise fees’ sales. As part of the franchise agreement, McJobee provides pre-opening
services, including supply and installation of cooking equipment and cash registers, valued at
P30,000, which is the stand-alone selling price of the pre-opening services. In addition, the
franchise agreement includes a license of Intellectual Property such as McJobee’s trademark
and trade name to the franchisee. McJobee has determined that the license provides a right to
access the Intellectual Property over time. McJobee has determined the stand-alone selling
price of the license is P70,000. The franchise agreement has a term of 10 years. On january 1,
2016, the franchisee paid the non-refundable upfront franchise fee of P95,000 to McJobee.

McJobee evaluates the arrangement and determines it meets the criteria to be accounted as a
contract with a customer under IFRS 15. McJobee determines its pre-opening services and
license of Intellectual Property are each distinct and, therefore, need to be accounted for as
separate performance obligations. As of December 31, 2016. McJobee already satisfied its
performance obligation to supply and install cooking equipment and cash registers to the
franchisee. For the year ended December 31, 2016, the franchisee reported sales revenue of
P100,000.

Under IFRS, 15, how much total revenue shall be recognized by McJobee for the year
ended December 31, 2016?

a. P 95,000
b. P 28,500
c. P 6,650
d. P 45,150
6. Starbeans Inc. operates and franchises coffee shops around the world. On January 1, 2016.
Starbeans Inc. entered into a franchise agreement with a franchisee. As part of its franchise
agreement, Starbeans requires a franchisee to pay an initial franchise fee in the amount of
P1,500,000 of which P500,000 is payable at the date of perfection of contract and the
balance payable in five equal annual instalments every December 31. The franchisee issued
a non-interest bearing note with effective interest rate of 10% for the balance of the initial
franchise fee and the present value of the note is P758,157. The franchise agreement also
provides for ongoing payment of royalties of 5% based on sales revenue of franchisee. As
part of the franchise agreement, Starbeans provides pre-opening services, including supply
and installation of coffee equipment and cash registers with a total cost of P754,894.
Starbeans evaluates and determines that the contract with the customer is a single
performance obligation that need not be separated. As of July 1, 2016, McJobee already
satisfied its performance obligation to supply and install coffee equipment and cash registers
to the franchisee. For the year ended December 31, 2016, the franchisee reported sales
revenue in the amount of P1,000,000.

1. What is the net income to be reported by Starbeans for the year ended December
31, 2016, if the collection of the note receivable is reasonably assured?

a. 629,079
b. 579,079
c. 553,263
d. 503,263

2. What is the net income to be reported by Starbeans for the year ended December
31, 2016, if the collection of the note receivable is not reasonably assured?

a. 375,490
b. 325,490
c. 299,674
d. 125,816

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